Nokia hires Marvell to fix 5G problems

Nokia has brought in chipmaker Marvell to help resolve 5G product problems that have wiped billions off the Finnish vendor's market value and threatened its ability to compete in the 5G market.

The US chipmaker, which made nearly $3 billion in revenues last year, has been hired to work on Nokia's new range of system-on-a-chip and infrastructure processors, under the ReefShark brand. It will specifically contribute customized chips based on processor designs by ARM, a UK-based company whose licensees compete against Intel in semiconductor markets.

The chipsets that come out of the partnership will go into several parts of Nokia's Airscale-branded radio access technology. Nokia is hoping for a reduction in size and power consumption, as well as improvements in capacity and overall performance.

Marvell's chipsets will gradually replace the field programmable gate arrays (FPGAs) that Nokia originally chose for its 5G products in what now looks to have been a strategic blunder. It hoped the FPGAs, which can be configured after the design stage, would give it a product advantage and satisfy customer needs, but they have turned out to be far more expensive than customized chips.

Nokia also said it was let down by one of its suppliers. While the company has not been named by Nokia, several analysts have subsequently identified Intel as the source of the problem. "We believe the key problem area for Nokia has been the development of the 5G baseband, due to both Nokia's internal development issues and Intel's 10nm [10-nanometer] delays," said Barclays in a research report published in November last year.

Notifying analysts of the problems last October, Nokia said it would have to pause dividends and lower cost-saving targets while it channeled additional funds into 5G research and development. Nokia's market value plummeted by €6 billion ($6.7 billion) on the morning of its third-quarter earnings update after executives slashed profitability targets for 2019 and 2020.

The cost impact of the FPGAs can be seen in the gross margin for Nokia's networks business, which shrank to 30.6% last year from 34% in 2018. In its fourth-quarter earnings report, issued last month, the company said: "We experienced relatively high 5G product costs in mobile access."

Investors will now be watching closely to see if margins improve as the FPGAs are phased out. Products based on its system-on-a-chip technology made up just 10% of 5G shipments in the recent fourth quarter, but the figure is expected to hit 35% by the end of this year and 70% by the end of 2021.

Barclays had anticipated a deal between Nokia and Marvell in its November report. "We think these delays have led them to work with Marvell for their 5G baseband," it said. "We expect Nokia to begin the transition away from FPGA to Marvell's baseband from 1Q20."

Analysts at the bank said their research suggested Nokia has also been working more closely with Broadcom and Global Unichip/TSMC on certain radio and analog functions.

Nokia's share price barely moved in Finland today, closing at about €3.40. It has fallen from €5.34 this time last year amid worries about Nokia's 5G competitiveness and position in China, where it recently appears to have lost mobile market share.

Shares in Marvell were trading up 3.6% on the Nasdaq following today's news, but they have lost 19% of their value since the start of the year.